North Sea Oil - End Of An Era

| About: Statoil ASA (STO)
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Summary

North Sea oil capex has declined significantly since the start of the oil crash. This significant decline in capex is the result of a high breakeven cost.

Oil production from the North Sea peaked in 1999 at 6 million barrels per day. From that point, it has declined significantly, a decline with should continue.

For those interested in taking advantage of the end of this era, I recommend two ways to do it.

The North Sea is a region of the Atlantic Ocean bordered on the west by Great Britain, the south by Germany, and the east by Scandinavia. The North Sea is enormous with an area of more than half a million square kilometers and contains a significant amount of oil resources. Despite these oil resources, as we will see through this article, the North Sea oil is in decline. This, as we will see, will help support global oil prices.

Introduction

North Sea oil was technically first found in 1851. However, the production did not begin to ramp up until the 1960s as the required technology was developed. With the 1973 and 1979 energy crisis, oil prices ramped up significantly making the North Sea economical to produce. This combined with several multi-billion barrel discovery allowed North Sea production to ramp up significantly.

North Sea - Business For Scotland

However, the North Sea remained expensive and dangerous. Despite its enormous oil reserves, they had to become both economical and safe to extract. By the 1980s, the cost to develop new technologies for North Sea oil extraction far exceeded NASA's budget to land a man on the moon. Since then, the North Sea has grown to a annual production rate of millions of barrels per day.

North Sea Reserves

Let's begin our discussion of how the North Sea is in decline by discussing the regions reserves.

North Sea Production - Crystol Energy

The North Sea is broken down into a number of different sectors controlled by country. Namely there is a British sector, Norwegian sector, Danish sector, German sector, and Dutch sector. For all practical purposes, the two sectors that matter are the British sector and the Norwegian sector which hold the vast majority of the region's reserves. These two regions each hold billions of barrels of oils.

According to the BBC, at the present time, the North Sea has had 40 billion barrels of oil removed. The region has 24 billion barrels remaining which will provide an estimated 30-40 years of production. However, the midpoint of this remaining reserves estimation assumes a daily production rate of 1.88 million barrels per day.

That means that oil prices will continue to remain incredibly low.

UKCS Oil and Gas Spending - Euanmearns

At the same time, North Sea oil and gas, long an enormous region of oil spending capex, has seen spending decline significantly. From 1972 to 2010, exploration capex started at just over $12 billion before dropping down to just over $6 billion. At that point, new discovery techniques increased spending in the region to a hair over $18 billion.

However, the North Sea remains one of the regions with the highest breakeven prices in the world. The North Sea oil requires prices of more than $60 per barrel to see earnings breakeven. Given present oil prices of just over $50 per barrel, that means that the North Sea production is losing money.

This has caused in oil capex in the region to drop significantly. Present capex in the region is 33% below pre-crash capex of $18 billion. This should accelerate the crash.

North Sea Production

Now that we have discussed the decline of reserves in the North Sea, as a result of long-term production in the region and declining capex, let's continue by discussing the North Sea's production.

Norway and UK Crude Production - Crystol Energy

This shows a combination of oil production from Norway and the United Kingdom, the two major companies that operate in the North Sea. As we can see, starting in 2010, the rate of the production decline began to slow down and then picked up some. This is the result of a rapid increase in capex in the region that we saw above helping to support production.

However, as we saw above, the North Sea is a region of high breakeven costs that requires a significant amount of capex. At the same time, the region's reserves have continued to decline. That means that the region should watch its production turn back down in the immediate term and then turn down further in the long run.

North Sea Production Forecast - Econ Browser

As we can see here, North Sea production has dropped but continues to remain stable. The production peaked in the late 1990s, and since then production has dropped from more than 6 million barrels per day by more than 50% to just over 3 million barrels per day. At the current rate forecast is expected to drop to less than 2 million barrels per day over the next decade.

That means that another 1 million barrels per day in daily oil production will be removed from the markets. This decline in production will need to be made up somewhere which should help to support oil prices. Over the following decade, production might decline even further by another 0.5 million barrels per day.

This is a significant amount of oil that will be removed from the markets. And oil that will need to be replaced.

Invest

First, we have discussed the detailed change in the North Sea reserves including how capex has declined. Then we discussed how the North Sea production, despite its pickup over the past few years as a result of increasing capex, has been declining. Now let's continue by discussing how to invest in these changes.

There are two ways I recommend investing in these changes. This section is just meant to be a brief overview to these opportunities, I recommend, if you are interested, you go and do more research on them yourself.

Statoil (NYSE:STO) is a Norwegian multinational oil and gas company with a market cap of more than $60 billion. The government of Norway owns an astounding 67% of the company and the company is headquartered in Stavanger, Norway. The company was founded in 1972 when North Sea production began to ramp up.

At the present time it earns a significant amount of cash from its North Sea production. This means that Statoil stands to take a big hit if North Sea production continues to decline. That means that Statoil might have a difficult time in the coming years, especially combined with the high price oil environment.

This may hurt Statoil as an investment.

Oil Prices - NYT

The second way to correct this is by betting on an oil recovery. Even with present oil prices of just over $50 per barrel, oil prices are still noticeably below their pre-crash highs. As North Sea production continues to decline, this will help alleviate the oil surplus helping oil prices.

As a result, betting on oil prices is another way to bet on a decline of production from the North Sea.

Conclusion

The North Sea has significant oil reserves that have continued to require significant amounts of capex spending. However, despite this exploration, the North Sea oil is declining and has at best just a few decades of production left. The region's high breakeven price means that production might decline even further.

In fact, the North Sea's oil production peaked in 1999 at 6 million barrels per day. From that point onward, oil production is expected to continue declining. This continued decline should help alleviate the oil surplus, helping oil prices.

At the same time, the decline of North Sea oil represents the end of an era.

Disclosure: I am/we are long STO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.